RETHINKING WILL HUTTON Principal of Hertford College,...

Western capitalism is in crisis. For decades investment has

been falling, living standards have stagnated or declined, and inequality has risen dramatically. Economic policy has neither reformed the fi nancial system nor restored stable growth. Climate change meanwhile poses increasing risks to future prosperity.

In this book some of the world’s leading economists propose new ways of thinking about capitalism. In clear and compelling prose, each chapter shows how today’s deep economic problems refl ect the inadequacies of orthodox economic theory and the failure of policies informed by it. The chapters examine a range of contemporary economic issues, including fi scal and monetary policy, fi nancial markets and business behaviour, inequality and privatisation, and innovation and environmental change. The authors set out alternative economic approaches which better explain how capitalism works, why it often doesn’t, and how it can be made more innovative, inclusive and sustainable. Outlining a series of far-reaching policy reforms, Rethinking Capitalism off ers a powerful challenge to mainstream economic debate, and new ideas to transform it.

With the rise of populist protest movements across the west, and the hard realities of stagnating real wages and entrenched inequality, it is plain that modern capitalism is not working. A new theoretical and policy roadmap is urgently needed. Rethinking Capitalism is an invaluable contribution to the challenging tasks ahead. WILL HUTTON Principal of Hertford College, University of Oxford, and author of The State We’re In

A fi ne collection by leading progressives on what went wrong - low growth, fl agging investment and innovation, too few jobs and too much carbon - and what might be done. May it close the door on the failed “mainstream” and open another, toward a fully-integrated, uncompromising, radical view of economics and economic policy.

JAMES K. GALBRAITH Lloyd M. Bentsen, Jr. Professor in Government and Business Relations, University of Texas at Austin, and author of The End of Normal: The Great Crisis and the Future of Growth

The economies of developed countries face profound problems, including congested and polluted cities, deep inequalities, and sluggish growth. And the next twenty years will have to see severe cuts in greenhouse gas emissions if we are to have any serious chance of avoiding dangerous climate change. Economic policy must change radically and quickly if we are to tackle these deep and inter-related problems. That means, in turn, a deeper understanding of the workings of our capitalist system. This book is a very valuable and thoughtful contribution to these crucial tasks.

LORD NICHOLAS STERN IG Patel Professor of Economics and Government at the London School of Economics, and author of The Economics of Climate Change: The Stern Review

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GILLIAN TETT, Financial Times

poqu_86_S1_oc.indd 1poqu_86_S1_oc.indd 1 25-06-2016 10:05:2725-06-2016 10:05:27

RETHINKING CAPITALISMEconomics and Policy for Sustainable and Inclusive Growth

RETHINKING CAPITALISM

Economics and Policy for Sustainable and Inclusive Growth

Edited byMichael Jacobs and Mariana Mazzucato

Wiley-BlackwellIn association with The Political Quarterly

This edition fi rst published 2016© 2016 The Political Quarterly Publishing Co. Ltd except for editorial material

Blackwell Publishing was acquired by John Wiley & Sons in February 2007. Blackwell’s publishing programme has been merged with Wiley’s global Scientifi c, Technical and Medical business to form Wiley-Blackwell.

Registered Offi ceJohn Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ,United Kingdom

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For details of our global editorial offi ces, for customer services, and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com/wiley-blackwell.

The rights of Michael Jacobs and Mariana Mazzucato to be identifi ed as the editor of the editorial material in this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher.

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First published in 2016 by John Wiley & Sons

Library of Congress Cataloging-in-Publication Data

Names: Jacobs, Michael, 1960- editor. | Mazzucato, Mariana, 1968- editor.

Title : Rethinking capitalism : economics and policy for sustainable and inclusive growth / edited by Michael Jacobs and Mariana Mazzucato.

Des cription: Chichester, West Sussex, United Kingdom : Wiley-Blackwell, in association with The Political Quarterly, 2016. | Includes bibliographical references.

Identifi ers: LCCN 2016024733 | ISBN 9781119120957 (pbk. : alk. paper)

Sub jects: LCSH: Capitalism. | Sustainable development. | Economic development-- Environmental aspects.

Classifi cation: LCC HB501 .R4295 2016 | DDC 330.12/2--dc23 LC record available at https://lccn.loc.gov/2016024733

Set in 10.5/12pt Palatino by SPSPrinted in the UK by the Hobbs Printers

1 2016

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Calum, Natasha and Lucienne

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Acknowledgements

WE ARE indebted to Daniele Girardi, Caetano Penna, Frank Brouwer and JeffMasters for their invaluable editorial work on key chapters of this book.

We are very grateful to Joni Lovenduski and Deborah Mabbett atThe Political Quarterly for their support, and for the great help provided byEmma Anderson. Thanks to Sandra Fardon Fox, Lena Hawkswood andRachel Smith at Wiley Blackwell, and to Kristy Barker and Sarah Price forcopy editing and proof reading.

Mariana Mazzucato acknowledges support from a research grant fromthe Institute for New Economic Thinking (grant no. 5474) and from theEuropean Community’s H2020-Euro-Society-2014 call on ‘Overcomingthe crisis: new ideas, strategies and governance structures for Europe’(ISIGrowth grant no. 649186).

© The Authors 2016. The Political Quarterly © The Political Quarterly Publishing Co. Ltd. 2016Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA

Contents

Notes on Contributors ix

1. Rethinking Capitalism: An IntroductionMICHAEL JACOBS and MARIANA MAZZUCATO 1

2. The Failure of Austerity: Rethinking Fiscal PolicySTEPHANIE KELTON 28

3. Understanding Money and Macroeconomic PolicyL. RANDALL WRAY and YEVA NERSISYAN 47

4. The Costs of Short-termismANDREW G. HALDANE 66

5. Innovative Enterprise and the Theory of the FirmWILLIAM LAZONICK 77

6. Innovation, the State and Patient Capital MARIANA MAZZUCATO 98

7. Investment-led Growth: A Solution to the European CrisisSTEPHANY GRIFFITH-JONES and GIOVANNI COZZI 119

8. Inequality and Economic GrowthJOSEPH E. STIGLITZ 134

9. The Paradoxes of Privatisation and Public Service OutsourcingCOLIN CROUCH 156

10. Decarbonisation: Innovation and the Economics of Climate ChangeDIMITRI ZENGHELIS 172

11. Capitalism, Technology and a Green Global Golden Age: The Role of History in Helping to Shape the FutureCARLOTA PEREZ 191

Index 218

vii

Notes on Contributors

Michael Jacobs is Visiting Professor in the School of Public Policy and Departmentof Political Science at University College London. An environmental economist andpolitical theorist, his work has focused on the political economy of environmentalchange. His books include The Green Economy: Environment, Sustainable Developmentand the Politics of the Future (Pluto Press, 1991), Greening the Millennium? The NewPolitics of the Environment (ed., Blackwell, 1997), The Politics of the Real World(Earthscan, 1996) and Paying for Progress: A New Politics of Tax for Public Spending(Fabian Society, 2000). From 2004 to 2010 he was a Special Adviser to the UK PrimeMinister, responsible for domestic and international policy on energy and climatechange, and before that (2004–2007) a member of the Council of Economic Advisersat the Treasury. He has previously been General Secretary of the Fabian Society, Co-Editor of The Political Quarterly and a research fellow at Lancaster University and theLondon School of Economics.

Mariana Mazzucato is the RM Phillips Professor in the Economics of Innovationat SPRU at the University of Sussex. She has held academic positions atthe University of Denver, London Business School, Open University and BocconiUniversity. Her book The Entrepreneurial State: Debunking Public vs. Private SectorMyths (Anthem, 2013) was on the Financial Times’ 2013 Books of the Year list. She iswinner of the 2014 New Statesman SPERI Prize in Political Economy and the 2015Hans-Matth€ofer-Preis, and in 2013 the New Republic called her one of the ‘three mostimportant thinkers about innovation’. She is an economic advisor to the Scottishgovernment and the Labour Party, and is a member of the World Economic Forum’sGlobal Agenda Council on the Economics of Innovation. Her current research isfunded by the European Commission, the Institute for New EconomicThinking (INET), the Ford Foundation, NASA and the Brazilian Ministry for Scienceand Technology.

Stephanie Kelton is Professor of Economics at the University of Missouri-KansasCity. Her research expertise is in Federal Reserve operations, fiscal policy, socialsecurity, international finance and employment. She is best known for hercontributions to the literature on Modern Monetary Theory. Her book, The State, TheMarket and the Euro (Edward Elgar, 2003) predicted the debt crisis in the eurozone.She served as Chief Economist on the US Senate Budget Committee and as aneconomic advisor to the Bernie Sanders 2016 presidential campaign. She wasFounder and Editor-in-Chief of the top-ranked blog ‘New Economic Perspectives’and a member of the TopWonks network of America's leading policy thinkers. Sheconsults with policy-makers, investment banks and portfolio managers across theglobe, and is a regular commentator on national radio and broadcast television.

L. Randall Wray is Professor of Economics at Bard College and Senior Scholar at theLevy Economics Institute. He is the author of Money and Credit in Capitalist Economies(Edward Elgar, 1990); Understanding Modern Money: The Key to Full Employment andPrice Stability (Edward Elgar, 1998); and Modern Money Theory: A Primer on


Macroeconomics for Sovereign Monetary Systems (Palgrave Macmillan, 2012, 2nd reved, 2015). He is also co-editor of, and a contributor to, Money, Financial Instability,and Stabilization Policy (Edward Elgar, 2006), and Keynes for the 21st Century: TheContinuing Relevance of The General Theory (Palgrave Macmillan, 2008). His latestbook is Why Minsky Matters: An Introduction to the Work of a Maverick Economist(Princeton University Press, 2016).

Yeva Nersisyan is Assistant Professor of Economics at Franklin and MarshallCollege. She received her BA in economics from Yerevan State University in Armeniain 2006, and her MA and PhD in economics and mathematics from the University ofMissouri-Kansas City in 2013. She is a macroeconomist working in the post-Keynesian and institutionalist traditions. Her research interests include banking andfinancial instability, and fiscal and monetary theory and policy. She has published anumber of papers on shadow banking, fiscal policy, government deficits and debt,financial fragility and instability, financial reform and retirement policy.

Andrew G. Haldane is the Chief Economist at the Bank of England and ExecutiveDirector, Monetary Analysis and Statistics. He is a member of the Bank’s MonetaryPolicy Committee. He also has responsibility for research and statistics across theBank. In 2014, TIME magazine named him one of the 100 most influential people inthe world. Andrew has written extensively on domestic and international monetaryand financial policy issues. He is co-founder of ‘Pro Bono Economics’, a charitywhich brokers economists into charitable projects.

William Lazonick is Professor of Economics at University of Massachusetts Lowell.He is co-founder and president of the Academic-Industry Research Network.Previously, he was Assistant and Associate Professor of Economics at HarvardUniversity, Professor of Economics at Barnard College of Columbia University andDistinguished Research Professor at INSEAD. His book Sustainable Prosperity in theNew Economy? Business Organization and High-Tech Employment in the UnitedStates (Upjohn Institute, 2009) won the 2010 Schumpeter Prize. His article,‘Innovative Business Models and Varieties of Capitalism’ received the HenriettaLarson Award from Harvard Business School for best article in Business HistoryReview in 2010. His article ‘Profits Without Prosperity: Stock Buybacks Manipulatethe Market and Leave Most Americans Worse Off’ was awarded the HBRMcKinsey Award for outstanding article in Harvard Business Review in 2014. He iscurrently completing a book, The Theory of Innovative Enterprise, to be published byOxford University Press.

Stephany Griffith-Jones is Financial Markets Director, Initiative Policy Dialogue,Columbia University; Emeritus Professor, Institute of Development Studies, SussexUniversity, where she was Professorial Fellow; and Research Associate, OverseasDevelopment Institute. An economist, she has led many major international researchprojects on international and domestic financial issues and has published widely,having written or edited over twenty books and numerous journal and newspaperarticles. Her books include Time for a Visible Hand: Lessons from the 2008 WorldFinancial Crisis, co-edited with Jose Antonio Ocampo and Joseph Stiglitz (OxfordUniversity Press, 2010), and Achieving Financial Stability and Growth in Africa, co-edited with Ricardo Gottschalk (Routledge, 2016). She has advised manyinternational organisations, including the European Commission, EuropeanParliament, World Bank, Commonwealth Secretariat, IADB and various UN agencies

x

NOTES ON CONTRIBUTORS

and several governments and central banks, including those of the UK, Chile,Sweden, South Africa, Tanzania, Brazil and Czech Republic.

Giovanni Cozzi is Senior Lecturer in Economics at the University of Greenwich anda member of the Greenwich Political Economy Research Centre. He was formerlySenior Economist at the Foundation for European Progressive Studies (FEPS) inBrussels and Research Fellow at the Centre for Development Policy and Research atthe School of Oriental and African Studies. His current research is on fiscal policies,the role of social and physical investment in promoting sustainable growth andemployment and the role of development banks. Several of his research publicationsemploy the Cambridge Alphametrics Model (CAM), a structuralist growth model, toproject alternative macroeconomic scenarios and their policy implications.

Joseph E. Stiglitz is University Professor at Columbia University, the winner of the2001 Nobel Prize in Economics and the John Bates Clark Medal. He was also one ofthe lead authors of the 1995 report of the Intergovernmental Panel on ClimateChange, which shared the 2007 Nobel Peace Prize. He is Co-Chair of the High-LevelExpert Group on the Measurement of Economic Performance and Social Progress atthe OECD, Chief Economist of the Roosevelt Institute, and the Founder and Co-President of Columbia University’s Initiative for Policy Dialogue. He was Chairmanof the US Council of Economic Advisors under President Clinton and ChiefEconomist and Senior Vice President of the World Bank from 1997 to 2000. He heldthe Drummond Professorship at All Souls College Oxford and has taught at MIT,Yale, Stanford and Princeton. His books include Globalization and its Discontents(Penguin, 2002), The Price of Inequality (Penguin, 2012) and The Great Divide: UnequalSocieties and What We Can Do About Them (Allen Lane, 2015).

Colin Crouch is a Professor Emeritus of the University of Warwick and externalscientific member of the Max Planck Institute for the Study of Societies at Cologne. Heis vice-president for social sciences of the British Academy. He is a former editor andformer chair of the editorial board of The Political Quarterly. He has published withinthe fields of comparative European sociology and industrial relations, economicsociology and contemporary issues in British and European politics. His most recentbooks include Post-Democracy (Polity, 2004); Capitalist Diversity and Change:Recombinant Governance and Institutional Entrepreneurs (Oxford University Press, 2005);The Strange Non-death of Neoliberalism (Polity, 2011); Making Capitalism Fit for Society(Polity, 2013); Governing Social Risks in Post-Crisis Europe (Edward Elgar, 2015); TheKnowledge Corrupters: Hidden Consequences of the Financial Takeover of Public Life (Polity,2015); and Society and Social Change in 21st Century Europe (Palgrave Macmillan, 2016).

Dimitri Zenghelis is Co-Head, Climate Policy at the Grantham Research Institute onClimate Change and the Environment at the London School of Economics. In 2013–2014 he was Acting Chief Economist for the Global Commission on the Economyand Climate. He was recently Senior Economic Advisor to Cisco’s long-terminnovation group (2008–2013) and an Associate Fellow at the Royal Institute ofInternational Affairs, Chatham House. Previously, he headed the Stern Review Teamat the Office of Climate Change, London, and was a senior economist on the SternReview on the Economics of Climate Change, commissioned by the then ChancellorGordon Brown. Before working on climate change, he was Head of EconomicForecasting at HM Treasury. He has also worked at Oxford Economics, the Instituteof International Finance, Washington DC, and Tokai Bank Europe, London.

xi


Carlota Perez is Centennial Professor of International Development at the LondonSchool of Economics, Professor of Technology and Development at TUT, Estonia,and Honorary Professor at SPRU, University of Sussex. She is the author ofTechnological Revolutions and Financial Capital: the Dynamics of Bubbles and Golden Ages(Edward Elgar, 2002). She conducts interdisciplinary research on the changingimpact of technical change on world development. She has always combinedteaching and research with consultancy and civil service. As Director ofTechnological Development in the Ministry of Industry of Venezuela, she created thenation’s first venture capital fund. As a consultant she has worked for business(including IBM, Cisco and PDVSA), several governments and various multilateralorganisations (such as IADB, UNCTAD, CEPAL, OECD, the World Bank and theEU). Her current research project, on the role of the state in shaping the context forinnovation, is being funded by the Anthemis Institute.

xii


1. Rethinking Capitalism: AnIntroductionMICHAEL JACOBS AND MARIANA MAZZUCATO

IN NOVEMBER 2008, as the global financial crash was gathering pace, the82-year-old British monarch Queen Elizabeth visited the London School ofEconomics. She was there to open a new building, but she was more inter-ested in the assembled academics. She asked them an innocent but pointedquestion. Given its extraordinary scale, how was it possible that no one sawthe crash coming?1

Hereditary sovereigns are not normally given to puncturing the preten-sions of those in charge of the global economy, or of the economists paid tounderstand it. But the Queen’s question went to the heart of two hugefailures. Western capitalism came close to collapsing in 2007–2008, and hasstill not recovered. And the vast majority of economists had not understoodwhat was happening.2

This book is about both failures. On the one hand the capitalist economiesof the developed world, which for two hundred years transformed humansociety through an unparalleled dynamism, have over the past decade lookedprofoundly dysfunctional. Not only did the financial crash lead to the deepestand longest recession in modern history; nearly a decade later, few advancedeconomies have returned to anything like a normal or stable condition, andgrowth prospects remain deeply uncertain. Even during the pre-crash periodwhen economic growth was strong, living standards for the majority ofhouseholds in developed countries barely rose. Inequality between the richestgroups and the rest of society has now grown to levels not seen since thenineteenth century. Meanwhile continued environmental pressures, especiallythose of climate change, have raised profound risks for global prosperity.

At the same time, the discipline of economics has had to face seriousquestions about its understanding of how modern economies work. What madethe financial crisis such a shock—in two senses—was not simply that very feweconomists had predicted its coming. It was that over the previous decade themainstream view was that policy-making had essentially solved the fundamen-tal problem of the business cycle: major depressions, it was believed, shouldnow be a thing of the past. And economic policy since the crisis has been nomore successful. The orthodox prescription of ‘fiscal austerity’—cutting publicspending in an attempt to reduce public deficits and debt—has not restoredWestern economies to health, and economic policy has signally failed to dealwith the deep-lying and long-term weaknesses which beset them.

The core thesis of this book is that these failures in theory and policy arerelated. Mainstream economic thinking has given us inadequate resources to


understand the multiple crises which contemporary economies now face. Toaddress these crises, we need a much better understanding of how moderncapitalism works—and why in key ways it now doesn’t. A reappraisal ofsome of the dominant ideas in economic thought is required. And in turnthis needs to inform a set of new directions in economic policy-makingwhich can more successfully tackle modern capitalism’s problems.

Each of the chapters of the book therefore addresses both a key economicproblem and the orthodox economic way of understanding it. The authorsoffer a different and more sophisticated approach to economic analysis, andfrom this generate new policy solutions. To do this they draw on importantschools of economic thought whose powerful understandings of capitalistsystems have been largely forgotten or sidelined in mainstream debate. Ineach case their conclusion is that capitalism can be reshaped and redirectedto escape its present failures. But this can only be achieved if the mentalframeworks of economics are rethought, and new approaches to policytaken.

Capitalism and its discontentsIn this Introduction we pull together some of the key ideas which animatethe book. We first set out the evidence of Western capitalism’s failures,explaining the three fundamental problems which define its current weakperformance. After describing the approach taken to these problems byeach chapter, we draw out some of the lessons for economic theory andanalysis. We offer a critique of the orthodox notions of markets and‘market failure’. And we explain how a richer and deeper understanding ofcapitalism can generate more successful approaches to economic policy,aimed at achieving more innovative, inclusive and sustainable forms ofgrowth and prosperity.

Weak and unstable growthThere is no escaping the starting point for this analysis. The financial crashof 2008, and the long recession and slow recovery which followed, haveprovided the most obvious evidence that Western capitalism is no longergenerating strong or stable growth.

The scale of the crash can hardly be exaggerated. In 2009 real grossdomestic product fell in thirty-four of thirty-seven advanced economies andthe global economy as a whole went into recession for the first time sinceWorld War II.3 In a single year, real GDP fell by 4.5 per cent across the eurozone (including by 5.6 per cent in Europe’s strongest economy, Germany),5.5 per cent in Japan, 4.3 per cent in the UK and 2.8 per cent in the UnitedStates.4 Between 2007 and 2009, global unemployment rose by around 30million, over half of which was in advanced economies, including anincrease of 7.5 million people in the US.5

2

MICHAEL JACOBS AND MARIANA MAZZUCATO

To prevent an even bigger crisis, governments were forced to put unprece-dented sums of taxpayers’ money into bailing out the banks whose lendingpractices had precipitated the crisis. In the US the Federal Reserve had at itspeak $1.2 trillion of emergency loans outstanding to thirty banks and othercompanies. In the UK, the government’s exposure for support provided tothe banks in the form of cash and guarantees peaked at £1.162 trillion.6 At thesame time governments undertook major stimulus measures to try to sustaindemand as private spending and investment collapsed. The huge drop in out-put and the rise in unemployment led to large increases in public deficits astax revenues fell and the ‘automatic stabilisers’ of welfare payments and otherpublic spending took effect. In 2009–2010 these deficits reached as much as32.3 per cent in Ireland, 15.2 per cent of GDP in Greece, 12.7 per cent in theUS, 10.8 per cent in the UK, 8.8 per cent in Japan and 7.2 per cent in France.7

The financial crash exposed fundamental weaknesses in the functioningand regulation of the global financial system. As former Chairman of theFederal Reserve Alan Greenspan grudgingly acknowledged in his testimonyto Congress, there had been a ‘flaw’ in the theory underpinning the Westernworld’s approach to financial regulation. The presumption that ‘the self-interest of organisations, specifically banks, is such that they were bestcapable of protecting shareholders and equity in the firms’ had provedincorrect.8 Contrary to the claims of the ‘efficient markets hypothesis’ whichunderpinned that assumption, financial markets had systematically mis-priced assets and risks, with catastrophic results.9

The financial crash of 2008 was the most severe since that of 1929. But asCarmen Reinhart and Kenneth Rogoff have pointed out, since most countriesundertook financial liberalisation in the 1970s and 1980s, there has been amarked increase in the frequency of banking crises (see Figure 1).10 Globally,in the period 1970 to 2007, the International Monetary Fund has recorded124 systemic bank crises, 208 currency crises and 63 sovereign debt crises.11

For modern capitalism instability has become, not the exception, but a seem-ingly structural feature.

Unsurprisingly, policy-makers have focused since the crash on improvingthe regulation of banks and seeking to increase the overall stability of thefinancial system.12 But important though this is, it does not address the morefundamental failure of modern capitalist economies to generate enoughpublic and private investment in the real economy to fuel growth and asustained level of demand.

The financial crisis exposed the uncomfortable truth that much of theapparently benign growth which had occurred in the previous decade didnot in fact represent a sustainable expansion of productive capacity andnational income. Rather, it reflected an unprecedented increase in householdand corporate debt (see Figure 2). Low interest rates and lax lending prac-tices, particularly for land and property, had fuelled an asset price bubblewhich would inevitably burst. In this sense the pre-crisis growth of outputcan be judged only alongside its post-crisis collapse.

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RETHINKING CAPITALISM: AN INTRODUCTION

Since 2008, most Western economies have gradually returned to economicgrowth. But the recovery was the slowest in modern times. Output in theUS, France and Germany did not return to pre-crash levels for fully three

Figure 1: Percentage of countries experiencing a banking crisis (1945–2008) (weightedby their share of world income)Note: Sample size includes all countries that were independent states in the given year.Source: C. M. Reinhart and K. S. Rogoff, This Time is Different: Eight Centuries of Financial Folly,Princeton, NJ, Princeton University Press, 2009.

Figure 2: Outstanding private debt (% of GDP)Source: OECD.stat (http://stats.oecd.org/index.aspx?queryid=34814 (accessed 12 April 2016)).

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years. For the UK it took more than five (see Figure 3). Across most devel-oped economies, unemployment has remained stubbornly above its pre-crisisrate. It was higher in 2014 than in 2007 in twenty-eight of thirty-three OECDcountries for which comparable data is available (see Figure 4).13 Even incountries where unemployment is lower than in 2007 or has been fallingsince its post-crisis peak, wages have been largely stagnant in real terms (seeFigure 5). In the UK, where employment has grown, real wages sufferedtheir sharpest decline since records began in 1964.14

Underpinning this weak growth pattern has been a dramatic collapse inprivate sector investment. Investment as a proportion of GDP had alreadybeen falling throughout the previous period of growth (see Figure 6).Since 2008 this has occurred despite the unprecedented persistence ofnear-zero real interest rates, bolstered in most of the major developedeconomies by successive rounds of ‘quantitative easing’, through whichcentral banks have sought to increase the money supply and stimulatedemand. Yet they have barely succeeded, as continuing low inflation rateshave revealed.

The decline in investment is also related to the marked ‘financialisation’ ofthe corporate sector. Over the past decade or so, an increasing percentage ofcorporate profits has been used for share buybacks and dividend paymentsrather than for reinvestment in productive capacity and innovation. Between2004 and 2013 share buybacks by Fortune 500 companies amounted to aremarkable $3.4 trillion. In 2014, these companies returned $885 billion toshareholders, more than their total net income of $847 billion.15

Figure 3: Comparing profiles of UK recessions and recoveriesNotes: Calculated from centred three-month moving averages of monthly GDP; the effect ofthe miners’ strike in 1921 is excluded from the 1920–4 profile (the strike started on 31 March1921 and ended on 28 June 1921). The effects of the miners’ strike and the General Strike in1926 are also excluded.Source: National Institute of Economic and Social Research, NIESR Monthly Estimates ofGDP, 7th October, 2014, London, 2014, p. 1, http://www.niesr.ac.uk/sites/default/files/publi-cations/gdp1014.pdf (accessed 12 April 2016).

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http://www.niesr.ac.uk/sites/default/files/publications/gdp1014.pdf

Figure 4: Unemployment rates, selected countries, 2007, 2010 and 2014Source: OECD.stat (https://data.oecd.org/unemp/unemployment-rate.htm (accessed 12 April2016)).

Figure 5: Average real wage index for selected developed countries, 2007–2013Source: ILO Global Wage Report 2014/15, Geneva, International Labour Office, Geneva, 2015.

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One critical result of the decline in investment is that productivitygrowth has also been weak relative to historic trends. In the decade priorto the crisis, labour productivity growth was below trend in almost allG7 countries, in some continuing a thirty-year decline. Since the financialcrisis it has fallen further in most developed countries, including the US,Japan, France and the UK.16 At the same time there appears to be someevidence that rates of productivity-enhancing innovation have also sloweddown.17 All this has led some economists to ask whether Western capital-ism has entered a period of ‘secular stagnation’, in which a structuralweakness of investment and demand leaves positive interest rates nolonger able to support full employment. While such a prospect shouldnot be regarded as somehow inevitable, it reflects a widespread concernthat developed economies may face a long period of low growth andfinancial instability.18

Stagnant living standards and rising inequalityBut weak and unstable growth is only part of modern capitalism’s problem.One of the most striking features of Western economies over the past fourdecades is that, even when growth has been strong, the majority of householdshave not seen commensurate increases in their real incomes. In the US, realmedian household income was barely higher in 2014 than it had been in 1990,though GDP had increased by 78 per cent over the same period.19 Thoughbeginning earlier in the US, this divergence of average incomes from overalleconomic growth has now become a feature of most advanced economies.

There are in fact three separate trends here. In most developed countries,the total share of labour (salaries and wages) in overall output has fallen,

Figure 6: Investment (gross non-residential fixed capital formation) as a percentageof GDPSource: Eurostat (http://ec.europa.eu/eurostat/data/database (accessed 12 April 2016)).

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earnings have not kept pace with gains in productivity and the distributionof the reduced labour share has become more unequal.

Across advanced economies, the share of GDP going to labour fell by 9per cent on average between 1980 and 2007, including 5 per cent in the US(from 70 to 65 per cent), 10 per cent in Germany (from 72 to 62 per cent)and fully 15 per cent in Japan (from 77 to 62 per cent).20 Pay tended to trackproductivity until the 1970s. But since 1980, real hourly labour productivityin the US (non-farm) business sector has increased by around 85 per cent,while real hourly compensation has increased by only around 35 per cent.21

Since 1999, the ILO calculates that across thirty-six developed economies,labour productivity has increased at almost three times the rate of real wagegrowth (see Figure 7).

At the same time as the labour share has been falling, more of it has beengoing to workers at the top of the earnings scale and less to those in themiddle and bottom. Across advanced economies, higher-skilled workersclaimed an additional 6.5 percentage points of the labour share between1980 and 2001, whereas low-skilled workers saw their portion shrink by 4.8percentage points.22

Meanwhile, those at the very top of the income distribution have doneexceedingly well. In the US, between 1975 and 2012, the top 1 per centgained around 47 per cent of the entire total of pre-tax increase in incomes(see Figure 8). In Canada over the same period it was 37 per cent, and in

Figure 7: Trends in growth in average wages and labour productivity in thirty-sixdeveloped economies, 1999–2013Note: Wage growth is calculated as a weighted average of year-on-year growth in averagemonthly real wages in thirty-six developed economies. Index is based on 1999 because of dataavailability.Source: ILO Global Wage Report 2014/15, Geneva, International Labour Office, 2015.

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Australia and the UK over 20 per cent.23 In the US, the incomes of the rich-est 1 per cent rose by 142 per cent between 1980 and 2013 (from an averageof $461,910, adjusted for inflation, to $1,119,315) and their share of nationalincome doubled, from 10 to 20 per cent. In the first three years of therecovery after the 2008 crash, an extraordinary 91 per cent of the gains inincome went to the richest one-hundredth of the population.24 Overall,across the OECD over the past twenty years, the proportion of the labourshare taken by the top 1 per cent of earners has increased by a fifth.25

At the same time, most developed countries have seen labour marketsbecome more polarised and insecure. In the decade between the late 1990sand late 2000s, the proportion of low-paid workers increased in mostadvanced economies.26 Since the financial crash unemployment hasremained stubbornly high, particularly among young people. Across theOECD, unemployment in the 16–25 age group averaged 15 per cent in 2014,with rates of over a third in Spain, Portugal, Italy and Greece.27 ‘Non-standard’ work (covering part-time, temporary and self-employed work,though not all of this is insecure) now accounts for around a third of totalemployment in the OECD, including half the jobs created since the 1990sand 60 per cent since the 2008 crisis. In 2013 almost three in ten part-timeworkers across the OECD were ‘involuntary’, meaning that they wanted towork full-time but could only find part-time jobs.28

The result of these trends has been a rise in inequality across the devel-oped world. Between 1985 and 2013, the Gini coefficient measuring incomeinequality increased in seventeen OECD countries, was little changed in fourand decreased in only one (Turkey).29 Wealth inequality has grown evenmore than that of income, a result both of the shift in the distribution ofearnings away from wages and towards profits and of the huge increase inland and property values. In the UK the share of national wealth owned bythe top 1 per cent rose from 23 per cent in 1970 to 28 per cent in 2010. In the

Figure 8: Growth in real after-tax income from 1979 to 2007, USSource: Congressional Budget Office, Trends in the Distribution of Household Income Between 1979and 2007, Congressional Budget Office Publication No. 4031, 2011, Summary Figure 1.

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US it has risen from 28 to 34 per cent over the same period. In the USin 2010, the top 0.1 per cent alone owned almost 15 per cent of all wealth. Inboth countries, over 70 per cent of all wealth is now owned by a tenth ofthe population.30

Climate change and environmental riskUnderlying these recent trends in modern capitalism is another, deeper one.This is that of rising global greenhouse gas emissions, which have put theworld at severe risk of catastrophic climate change.

Throughout capitalism’s history economic growth has been accompaniedby environmental damage, from the pollution of air, water and land to theloss of habitats and species, a constant subtraction from its successes inincreasing welfare. In developed countries some of these problems have beenpartially tackled; but none has been solved. It remains too little acknowl-edged how dependent human societies are on the biophysical processeswhich underpin them, and how dangerous are the critical thresholds (or‘planetary boundaries’) which many of these processes have now reached orare close to reaching.31

But climate change poses a unique kind of global threat. The cumulativeeffect of two hundred years of fossil fuel use in the developed world, nowcompounded by rapid growth in the emerging economies, means that, unlesscurrent emissions levels are drastically reduced, the world faces seriousdamage. At current emissions rates, the earth is on course for an increase inaverage global temperature of 3–4 degrees Celsius or more. Even above 2degrees of warming, the Intergovernmental Panel on Climate Change warnsthat we can expect a much higher incidence of extreme weather events (suchas flooding, storm surges and droughts), which may lead to a breakdown ofinfrastructure networks and critical services, particularly in coastal regionsand cities; lower agricultural productivity, increasing the risk of foodinsecurity and the breakdown of food systems; increased ill-health and mortal-ity from extreme heat events and diseases; greater risks of displacement ofpeoples and conflict; and faster loss of ecosystems and species.32

Broadly speaking, the evidence on this has been known for a quarter of acentury.33 But until very recently very little has been done to avoid it. Themajor reason is that the production of greenhouse gas emissions—particularlycarbon dioxide—is so embedded in capitalism’s historic systems of productionand consumption, which have been built on the use of fossil fuels. In total 80per cent of the world’s energy still comes from oil, gas and coal. In developedeconomies, as a result both of structural deindustrialisation and recent climate-related policies, emissions are now declining. But part of this is simply due tothe effective transfer of production to the developing world as globalisationhas occurred.34 Western economies are not yet reducing their emissions—either those they generate themselves or those embodied in the goods andservices they import—at anything like the speed required to control global

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warming (see Figure 9). Modern capitalism has in effect been storing up pro-found risks to its own future prosperity and security.

Rethinking economic policyIn all these ways, therefore, the performance of Western capitalism in recentdecades has been deeply problematic. The problem is that these failings arenot temporary; they are structural. Regulators are now seeking to reduce thesystemic risks created by financial market behaviour; but the complexity ofthe modern financial system has generated widespread concern that theycannot be eliminated. Strongly embedded incentives for both asset-holdersand senior corporation executives create powerful tendencies towards

Figure 9: Global greenhouse gas emissions 1990–2050Source: UNEP, The Emissions Gap Report 2015, Nairobi, United Nations Environment Programme,2015, based on scenarios in the Intergovernmental Panel on Climate Change 5th AssessmentReport, 2014, http://uneplive.unep.org/media/docs/theme/13/EGR_2015_301115_lores.pdf(accessed 12 April 2016).

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short-termism in both finance and industry. Low levels of investment, partic-ularly in innovation, arise both from these incentives and from entrenchedweaknesses in demand across the world’s economies. Stagnant real wagesand rising inequality spring from the structures of the labour market, corpo-rate remuneration and ownership of land and wealth. High greenhouse gasemissions are embedded in the structures of energy and transport systems.None of these problems look likely to be solved by current approaches toeconomic policy in any developed country.

This does not mean, however, that there are no solutions. Western capital-ism is not irretrievably bound to fail; but it does need to be rethought. Foras the authors collected together in this book argue, the orthodox economictheory which underpins most current policy-making does not provide aproper understanding of how modern capitalism works, and therefore howto make it work better. They therefore base their prescriptions for newpolicies on a critique of the dominant approach to economics in their fieldand the presentation of a more powerfully explanatory alternative. Eachchapter addresses a particular problem of modern capitalism and theassociated policy debate.

One of the most contentious of those debates has concerned the role offiscal and monetary policy in response to the financial crisis and the ensuingslow recovery. In their chapters, Stephanie Kelton, and Randall Wray andYeva Nersisyan take issue with the orthodox prescription of fiscal austerity.Kelton’s argument is that austerity is based on a fundamental economicmisunderstanding. The claim that high deficits caused the recession turnsthe facts on their head: it was the recession which caused deficits to balloon,as the downturn slashed the tax revenues earned by governments and theautomatic stabilisers of social security benefits and public spending wentinto operation. Kelton shows that in fact the deficits prevented the recessionbecoming much worse, generating demand just as the dramatic reduction inprivate consumption and investment was cutting it. Since all saving andborrowing in an economy (including its overseas sector) must by definitionbalance, increased public debt was an inevitable consequence of the hugeretrenchment of private saving which occurred after the crash. By withdraw-ing demand from the economy in an attempt to get deficits down as quicklyas possible, austerity policies have delayed recovery and, in the case ofparticularly hard-hit countries such as Greece, Spain and Portugal, largelyprevented it. Very slow growth meant that deficits did not, in fact, fall asquickly as anticipated: austerity did not succeed even in its own objective.

Wray and Nersisyan go further. They argue that the orthodox view ofmacroeconomic policy stems from an incorrect understanding of the natureof money. Rather than being exogenously determined by the central authori-ties, as the orthodox view has it, money is effectively created whenever com-mercial banks lend, and thereby increase their borrowers’ purchasing power.Money is endogenous to the real economy. Examining the operations ofmodern central banks, Wray and Nersisyan show that for a nation with its

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own currency, government spending is not constrained by the resourcesavailable from taxation or borrowing.35 The euro zone in particular hassuffered from its rules expressly designed to prevent weaker European econo-mies from borrowing in the absence of their own currency. Quantitativeeasing meanwhile is a poor way of boosting aggregate demand. Fiscal policy,the authors argue, is a much more powerful and effective tool for stimulatinggrowth.

Perhaps unsurprisingly, austerity policies have not succeeded in reversingthe low levels of investment which have characterised Western economiesfor a long period. In their chapters, Andrew Haldane, William Lazonick,Mariana Mazzucato, and Stephany Griffith-Jones and Giovanni Cozziaddress the economic sources of this problem.

Haldane asks if short-termism in financial markets may have reduced thewillingness of firms to invest. Examining how far share prices revealexcessive discounting of future earnings, he finds an economically significanteffect in the period since 1995 that was absent in the previous decade.Similarly, analysing the comparative behaviour of private and publiclyquoted firms in distributing dividends, rather than retaining earnings forinvestment, he finds that UK private firms tend to plough between four andeight times more of their profits back into their business over time thanpublicly held firms. Overall, he concludes that short-termism appears to bemaking a material difference to corporate investment behaviour. He suggestsvarious policy remedies, including greater transparency of long-termbusiness strategy, changes in the ways senior executives are remunerated,reforms to shareholder governance and changes in the taxation regime toreward long-term asset holding.

Lazonick focuses on the orthodox economic theory of the firm. Neoclassi-cal economists draw on a model of the firm as an optimising profit-makerconstrained in its behaviour by the competitive markets in which it operates.But such a model cannot explain the phenomenon of innovation. Offering analternative theory of the innovative enterprise—firms which generateimprovements in productivity and more competitive goods and services,and are therefore the wellsprings of economic growth—Lazonick argues thatthe key is not the nature of the market, but the structure and organisation ofthe firm. Using the comparative example of Japanese and American indus-trial businesses in the second half of the twentieth century, he shows howdifferent organisational and management methods generate different degreesof innovation, and therefore commercial success. He argues that only bystudying real historical examples, rather than merely abstract theory, caneconomists properly understand how innovation and economic developmentoccur.

Mazzucato’s chapter picks up this theme. The orthodox economic view isthat innovation is carried out by the private sector, and government policyshould be restricted to basic scientific research. But Mazzucato shows thatthis is a misconception; in fact the modern state, particularly in the US, has

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been a driver of innovation in a whole range of fields. All the new technolo-gies in the Apple iPhone, for example, were developed with governmentsupport. Detailing how reluctant private investors have become to financeinnovation—contrary to the orthodox myth of ‘venture capitalism’—sheargues for an ‘entrepreneurial state’ investing in innovation to address majorsocietal problems such as climate change and elderly healthcare. Given therisks that ‘directing’ innovation entails (choosing particular missions, tech-nologies, sectors and firms to support), taxpayers should share in therewards. She argues that state investment banks, such as Germany’s KfW,can play a particularly important role in directing long-term ‘patient’ capitalto higher-risk infrastructure and innovation.

Griffith-Jones and Cozzi then show what an investment programme basedon these principles might achieve. Criticising the inadequate response ofEuropean Union policy-makers to the slow recovery after the financial crash,the authors propose a five-year investment stimulus package based onadditional lending by the European Investment Bank (the EU’s state invest-ment bank). Taking issue with the orthodox economic view that publicinvestment will ultimately ‘crowd out’ private, they argue that at very lowinterest rates, with a glut of capital looking for returns, the opposite is in factthe case: public investment will leverage greater private capital. They use amacroeconomic model to compare their investment package to ‘business asusual’: they find that not only would it increase European growth rates andemployment, it would also reduce public deficits more rapidly.

The chapters by Joseph Stiglitz and Colin Crouch look at two of the majorgaps between orthodox economic theory and the reality of modern capital-ism. Stiglitz addresses the growth of inequality over the past thirty years.He takes on the neoclassical view that wages and salaries reflect themarginal productivity of workers, showing that the very high incomes ofcorporate executives in fact reveal a form of ‘rent-seeking’, in which rewardsare extracted without relation to productivity or economic desert. Moreoverhe points out—again contrary to the orthodox view—that such inequality isnot the price that has to be paid for greater economic prosperity, but actu-ally retards growth. Stiglitz offers a range of policy measures which wouldreverse recent trends, including changes to executive compensation schemes,macroeconomic policies to reduce unemployment, greater investment in edu-cation and the reform of capital taxation. He concludes by insisting thateconomic policy indicators must do more than measure growth of GDP: itsdistribution and content also matter.

Crouch looks at the experience of privatisation and outsourcing. Overrecent decades, a number of countries (notably the UK) have privatisednationalised industries and outsourced public services to market competition.These policies have followed the precepts of neoliberal economic theory,which argues that competition in markets will generate greater efficiency andconsumer choice. But Crouch notes that this is not in fact what has happened.In practice, in both privatised industries and public service provision,

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oligopolies have been created, resulting in very little competition or consumerchoice. What were intended to be market-based processes have become deeplypoliticised, a form of ‘corporate neoliberalism’ which runs contrary to thetheory’s original claims. He argues that corporate lobbying has now becomeso powerful that the principles of democracy itself are threatened.

The final two chapters of the book examine capitalism’s environmentalconsequences. Dimitri Zenghelis shows why climate change poses such achallenge, not just to the economic system, but also to economics. Thescience of climate change means that greenhouse gas emissions mustultimately be reduced to near zero if the rise in global temperature is to bestopped. But almost all economic activity currently rests on the combustionof fossil-based carbon, the principal source of such emissions. So an almostcomplete structural transformation of energy, transport, land use and indus-trial systems will be required to tackle the problem. Zenghelis argues that inthe analysis of such a task, the focus of neoclassical economics on marginalmarket failures is wholly inadequate. We need rather to understand theprocesses of technological innovation and structural change. These areinfluenced both by ‘path-dependence’—through which historic investmentsconstrain future change—and by economic expectations. Strong andconsistent policy-making can help shift investment towards tipping pointswhen innovation may be driven rapidly in a low-carbon direction.

Carlota Perez notes that structural change of this kind has happenedbefore. From the original industrial revolution based on water power andmechanisation, through the ages of coal and steam, steel and railways, auto-mobiles and mass production, and latterly information and communicationstechnologies (ICT), the modern world has witnessed distinct waves of tech-nological revolution. Each of these has followed a pattern, both in thediffusion of the new technologies and products and in the response of thefinancial system and government policy-making. Perez argues that there isnow huge potential to combine the further development of ICT withenvironmental technologies which radically reduce the carbon and materialcontent of production and consumption. The result would be a new wave ofgrowth which would simultaneously reduce environmental damage, providenew sources of employment and potentially reduce inequalities. Arguing fora range of policies to accelerate such a transition, including a shift in theburden of taxation from labour and profit to energy and resources, Perezsees this both leading to, and drawing on, a redefined, greener vision of the‘good life’, in both developed and developing countries.

Beyond market failure: towards a new approachEach chapter of the book approaches its subject in a different way. Incommissioning them we wanted to reflect a variety of perspectives, both onthe nature of the problems of modern capitalism and in the economicsrequired to address them. The authors are responsible only for their own

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chapters: we did not seek, and do not claim, that they all agree with oneanother. Nevertheless, their critiques have many elements in common. Eachchallenges an important aspect of orthodox economic theory and policyprescription.

By ‘orthodox’ we mean the view that dominates public debate about eco-nomic policy. Within the academic discipline of economics there are livelyarguments about many aspects of theory and policy. But mainstreameconomic discourse rests to a powerful extent on a very simple underlyingconception of how capitalism works. This is that capitalism is an economicsystem characterised by competitive markets. In these markets privatelyowned companies, seeking to make profits for their shareholders, competewith one another to supply goods and services to other businesses and freelychoosing consumers. In individual markets, neoclassical theory (on whichthe orthodox view is based) holds that such competition drives economicefficiency, which in turn maximises welfare. Markets are assumed to tendtowards equilibrium, while businesses are assumed to be fundamentallyalike, analysed as ‘representative agents’ constrained to act in the same waysby the external pressures of the market. At the level of the economy as awhole, it is competition between firms which is believed to generate innova-tion, and therefore leads to long-run economic growth.

The orthodox model understands that markets do not always work well. Ittherefore uses the concept of ‘market failure’ to explain why suboptimaloutcomes occur and how they can be improved. Markets fail under variouscircumstances: when firms have monopolistic power which restricts competi-tion; when there are information asymmetries between producers andconsumers; when there are ‘externalities’ or impacts on third parties whichare not properly reflected in market prices; and where public and commongoods exist whose benefits cannot be captured by individual producers orconsumers.36 The propensity of real-world markets to fail in these variousways means that ‘free’ markets do not maximise welfare. So the theory ofmarket failure provides a rationale for government intervention. Public policyshould seek to ‘correct’ market failures—for example by promoting competi-tion; by requiring information about goods and services to be more widelyavailable; by forcing economic actors to pay for externalities through meanssuch as pollution taxes; and by providing or subsidising public goods.

At the same time, the orthodox view emphasises that it is not only mar-kets which fail; governments do too. Even well-meaning ones can intervenebadly, creating outcomes worse than if they had left markets alone—notleast because private actors often adjust their behaviour to compensate. Andpublic institutions are never disinterested—they develop goals and incen-tives of their own which may not reflect the general welfare of society as awhole. So public policy interventions always have to balance the goal ofcorrecting market failures with the risk of generating government failureswhich outweigh them.37

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Broadly speaking, it is this general model of capitalism which underpinsmost public economic commentary and policy-making today. And it leads tosome familiar policy conclusions. Chief among these is that markets generallyproduce positive outcomes which increase welfare, and should therefore beallowed to operate without much interference wherever possible. A basicregulatory framework of employment, consumer and environmental protectionis required to correct for clear externalities and information asymmetries; butgovernments should not seek to direct markets or shape the businesses whichoperate in them. The ‘invisible hand’ of the market knows best, generatingthe highest welfare-producing activities where firms seek to maximise valuefor their shareholders. Even where the market might seem to get it wrong,governments cannot presume to know better. So governments should beextremely wary of seeking to ‘pick winners’ through industrial and innovationpolicy; of seeking to push banks and other financial institutions to makespecific forms of investments; or of investing in the private economy them-selves. Public investment—particularly if funded by borrowing—will simply‘crowd out’ private investment. Governments should seek to use competitiveprivate enterprise to deliver public utilities and services wherever possible.Getting the public finances into balance should be the overwhelming priorityof fiscal policy. Taxation is necessary; but because it tends to disincentivisewealth creation and work, it should be kept as low as possible. Within each ofthese propositions lurks many a disagreement among academic economists,often informed by subtly complex theory and detailed empirical evidence. Butit is not hard to find these views expressed in public debate; and they havedominated the practice of policy-making over recent years.

The orthodox model provides an attractively simple framework for think-ing about economics and policy. It combines the mathematical elegance ofneoclassical microeconomics with plausible claims about the macroeconomy.The fact that many of the policy prescriptions which follow from it favourthose in positions of incumbent economic power has given it a powerful gripon public discourse.

But it’s not an adequate model for understanding how capitalism works.For markets are not simple structures which behave in the ways set out ineconomics textbooks; and ‘market failure’ is not a helpful concept for analys-ing capitalism’s major problems or how to address them. These idealisedtheories assume away many of capitalism’s key features, or treat them as‘imperfections’ rather than structural, systemic characteristics. They ignoremuch of the evidence on how different economies actually function, andwhen and why they have performed well or badly. None of the keyproblems which Western capitalism has experienced over recent decades—weak growth and financial instability, declining investment and financialisa-tion, the stagnation of living standards and rising inequality, dangerousenvironmental risk—are explained by them.

Capitalist economies are not theoretical abstractions but complex anddynamic systems, embedded in specific societies, as well as in natural

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environments governed by biophysical laws. They are formed of multiplerelationships between real and heterogeneous economic actors whosebehaviour is not that of idealised ‘representative agents’, but arises fromtheir particular characteristics and choices in different circumstances. Theserelationships give rise not to equilibrium, but to dynamic patterns of growthand change. The macroeconomic outcomes they generate are more thansimply the sum of their microeconomic parts. Their problems are not failuresof markets which ‘normally’ succeed, but arise from fundamental characteristicsand structures. So to understand how they work, and to explain how policycan help them work better, we need a much richer approach.

Fortunately, there are plenty of resources within economics with which todo this. For these characteristics of capitalist economies are hardly revela-tory. They have been analysed in theory and documented in practice formore than a hundred years of economic scholarship. They underlie the workof some of the greatest economists of the past century—such as Karl Polanyi,Joseph Schumpeter and John Maynard Keynes—and of the more recentschools of evolutionary, institutional and post-Keynesian economics. As theseparate chapters in this book show, analysis based on these foundationscan generate searching critiques of current policy, and powerful alternativeperspectives.

Three key insights underpin a rethinking of capitalism in these ways.First, we need a richer characterisation of markets and the businesses

within them. It is not helpful to think of markets as pre-existing, abstractinstitutions which economic actors (firms, investors and households) ‘enter’to do business, and which require them, once there, to behave in particularways. Markets are better understood as the outcomes of interactions betweeneconomic actors and institutions, both private and public. These outcomeswill depend on the nature of the actors (for example, the different corporategovernance structures of firms), their endowments and motivations, thebody of law and regulation and cultural contexts which constrain themand the specific nature of the transactions which take place. Markets are‘embedded’ in these wider institutional structures and social, legal andcultural conditions.38 In the modern world, as Polanyi pointed out, theconcept of a ‘free’ market is a construct of economic theory, not an empiricalobservation.39 Indeed, he observed that the national capitalist market waseffectively forced into existence through public policy—there was nothing‘natural’ or universal about it.40

The orthodox notion of competition between firms is equally misleading.Many of the most important markets in modern capitalism are oligopolisticin form, characterised by economies of scale and ‘network effects’ that leadto concentration and benefit incumbents. But even where there is greatercompetition, capitalist businesses are not all the same, forced to behave insimilar ways by the external forces of ‘the market’. On the contrary, asLazonick shows, what we actually observe is persistent heterogeneity, bothin businesses’ internal characteristics and in their reactions to different

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market circumstances. Given that they must compete through innovation,this is hardly surprising. As evolutionary economics has emphasised, thisheterogeneity is not a short-run transition towards a world of similaractors, but a long-run feature of the system.41 Different norms and routinescombine to generate different behaviours and outcomes.

In fact, the evidence shows the particular importance of ownership andgovernance structures. Over the past thirty years the orthodox view thatthe maximisation of shareholder value would lead to the strongest eco-nomic performance has come to dominate business theory and practice, inthe US and UK in particular.42 But for most of capitalism’s history, and inmany other countries, firms have not been organised primarily as vehiclesfor the short-term profit maximisation of footloose shareholders and theremuneration of their senior executives. Companies in Germany, Scandi-navia and Japan, for example, are structured both in company law andcorporate culture as institutions accountable to a wider set of stakeholders,including their employees, with long-term production and profitabilitytheir primary mission. They are equally capitalist, but their behaviour isdifferent. Firms with this kind of model typically invest more in innovationthan their counterparts focused on short-term shareholder value maximisation;their executives are paid smaller multiples of their average employees’ sal-aries; they tend to retain for investment a greater share of earnings relativeto the payment of dividends; and their shares are held on average forlonger by their owners. And the evidence suggests that while their short-term profitability may (in some cases) be lower, over the long term theytend to generate stronger growth.43 For public policy, this makes attentionto corporate ownership, governance and managerial incentive structures acrucial field for the improvement of economic performance.

In short, markets are not idealised abstractions, but concrete and differen-tiated outcomes arising from different circumstances. Contrary to the claimsof orthodox economists that ‘the laws of economics are like the laws ofengineering: one set of laws works everywhere’,44 there are in fact manydifferent kinds of market behaviour, and several varieties of capitalism.45

The second key insight is that it is investments in technological andorganisational innovation, both public and private, which are the drivingforce behind economic growth and development. The diffusion of such inno-vations across the economy affects not just patterns of production, but ofdistribution and consumption. It has been the primary source of improve-ments in productivity, and consequent rises in living standards, for the past200 years.46 Thus a theory of how capitalist economies work must includeat its centre the dynamics of innovation, understanding both the specificnature of the investments needed and the turbulent, non-equilibriumoutcomes that result.

But this requires a much more dynamic and accurate understanding ofhow innovation occurs than is provided by the orthodox economic theoriesof imperfect competition. Drawing on Schumpeter’s original analysis of the

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processes of ‘creative destruction’,47 modern evolutionary economics hasdone much to explain how firms operate with bounded rationality incircumstances of uncertainty, where markets tend towards disequilibriumand change is path-dependent. Growth results from the co-evolution of tech-nologies, firms and industry structures and the social and public institutionswhich support them, connected by complex feedback processes.48

Promoting innovation therefore requires attention to be paid to each ofthese elements. The economy needs firms with risk-taking managementcultures and incentives which reward long-run perspectives, rather thanthose, as Haldane notes, focused largely on short-term financial returns.Innovation requires very specific forms of finance: patient, long-term andcommitted. As Griffith-Jones and Cozzi argue, this creates a particular rolefor public banks, able to steer finance towards long-run projects, leverageprivate capital and stimulate multiplier effects. Taxation policies need toincentivise long-term investment.

Critically, as Mazzucato shows, innovation also needs well-funded publicresearch and development institutions and strong industrial policies. Theseneed to be directed across the entire innovation chain, not only in the classic‘public good’ area of basic science. A crucial recognition is that innovationhas not only a rate, but also a direction.49 Historically, that direction has oftenbeen determined by ‘mission-oriented’ public policies, which have steeredboth public and private investments into new fields. During the mass pro-duction era, as Perez notes, it was policies around suburbanisation thatallowed the new technologies of mass production to be fully diffused anddeployed. Mazzucato observes that public funding drove both the IT revolu-tion and other fields such as bio- and nano-technologies and today’s greentechnologies.50 Each of these has involved both supply-side and demand-side policies, in which new markets as well as new products have beencreated and public investment has ‘crowded in’ private.

By setting societal missions, and using their own resources to co-investwith long-term capital, governments can do far more than ‘level the playingfield’, as the orthodox view would allow. They can help tilt the playing fieldtowards the achievement of publicly chosen goals. Just as the creation of thewelfare state in the postwar period, and the information technology revolu-tion in the decades around the turn of the century, unleashed new waves ofeconomic growth and widened prosperity, so new missions today have thepotential to catalyse new innovation and investment. Foremost among themmust be the transformative challenge of reducing and eventually eliminatinggreenhouse gas emissions to limit dangerous climate change, and of con-straining the economy’s wider environmental impacts within biophysicalboundaries. As Perez argues, there is particular potential for such a ‘green’direction, allied to the continuing development of information and communi-cations technologies, to drive a new wave of structural transformation andgrowth.

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Recognition of the role of the public sector in the innovation processinforms the third key insight. This is that the creation of economic value is acollective process. Businesses do not create wealth on their own. No businesstoday can operate without the fundamental services provided by the state:schools and higher education institutions, health and social care services,housing provision, social security, policing and defence, the core infrastruc-tures of transport, energy, water and waste systems. These services, the levelof resources allocated to them and the type of investments made in them,are crucial to the productivity of private enterprises. The private sector doesnot ‘create wealth’ while taxpayer-funded public services ‘consume’ it. Thestate does not simply ‘regulate’ private economic activity. Rather, economicoutput is co-produced by the interaction of public and private actors—andboth are shaped by, and in turn help to shape, wider social and environmen-tal conditions.

Keynes’ analysis of the business cycle was crucial in this regard.51 His keyinsight was that private investment was both too volatile and too pro-cyclical. It reinforces its own tendencies both to boom and slump. Govern-ment investment is thus needed not just to stabilise aggregate demand whenspending is too low, but also to stimulate the ‘animal spirits’ of the businesssector, which invests only when it is confident of future areas of growth.This point is about much more than the herd and bandwagon behaviour ofthe financial markets, as some have interpreted it.52 It makes the fundamentalcase for public investment as a means of creating economic opportunitiesand thereby increasing the willingness of firms to invest. As Zenghelisargues, the creation of expectations about future growth is a crucial role forgovernment, and not just during downturns. It is why mission-orientedinnovation policy—bringing Keynes and Schumpeter together—has such animportant role to play in driving stronger economic performance. Indeed,Keynes argued that the ‘socialisation of investment’—which, as Mazzucatosuggests, could include the public sector acting as investor and equity-holder—would provide more stability to the investment function and henceto growth.53

It is because public expenditure is critical to the co-production of the con-ditions for growth, as Kelton highlights, that the austerity policies whichhave reduced it in the period since the financial crash have proved so futile,increasing rather than diminishing the ratio of debt to GDP. And as Wrayand Nersisyan emphasise, the endogenous nature of money created by ‘key-strokes’ in the banking system gives governments far greater scope to usefiscal policy in support of economic growth than the orthodox approachallows.

So the size and functions of the state matter profoundly to the perfor-mance of capitalist economies. In orthodox economic commentary it isfrequently asserted that the role of the public sector should be minimised inorder to free private enterprise from the ‘dead hand’ of regulation and theperverse impact of ‘crowding out’. In fact, successful economies have almost

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all had states actively committed to their development.54 This is not justabout the role of the state in providing or co-investing in infrastructure (as issometimes conceded even by those otherwise sceptical of public investment),though this is indeed important. Its role in innovation is also key, as wehave seen. At the same time, the development of a skilled and adaptivelabour force requires deep investment in education, training, health, child-care and social care. These functions cannot simply be outsourced or priva-tised—as Crouch shows, when this is done the goal of greater competitionalmost always degenerates into private oligopoly, where public purpose islost, and corporate political influence increases. We need to acknowledge,rather, the interdependence of private enterprise and the public sector; ofmarket and non-market activities.

This has an important implication for the role of taxation. The orthodoxeconomic view characterises taxation as an essentially negative activity inwhich the value generated by private firms is confiscated by the state. Butunderstanding the role of the public sector in the co-production of economicoutput allows a more profound perspective. Taxation is the means by whicheconomic actors pay the public sector for its contribution to the productiveprocess. The orthodox model claims that reducing the share of taxation inoverall economic output will tend to strengthen growth. If taxation is usedproductively by an active public sector, the opposite can be the case.

The collective nature of capitalist production makes the distribution ofincome and wealth an important variable for growth. In the orthodox modelthe rewards to labour and capital are believed to reflect their (marginal)productivity. But as Stiglitz argues, this theory cannot explain the dramaticgrowth in inequality over recent decades. It is evident, rather, that share-holders and senior executives—particularly in the financial sector—areextracting unearned rent from the value firms produce. And as ThomasPiketty has shown, the inheritance of capital (particularly land and prop-erty), whose increase in value outpaces that of the economy as a whole,skews the overall distribution of wealth far away from any notion of earnedproductivity.55 This has a profound effect on the fairness and inclusivity oftoday’s economies. But it also negatively impacts on growth itself. There isstriking evidence—now gathered and acknowledged by the OECD and IMF—that economies with more equal distributions of income and wealth havestronger and more stable economic growth than those with greaterinequality.56 Redistributive policies which reduce inequality are found tohave in general a positive impact on growth.57

This creates a powerful case for the rebalancing of the distribution of earn-ings between capital and labour. Employees have in effect become too weak,as trade unions have lost powers and membership, and deregulated,‘flexible’ labour markets have allowed employers to bargain wages andworking conditions down. Crucially, as experience of legal minimum wageshas shown, raising wages tends to force firms to invest in improvingproductivity, which strengthens economic performance.58 Public policy

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therefore has an important role in regulating labour markets, promoting bothtrade union membership and employee ownership of capital, and managingmarkets in housing and land. It should also ensure progressive tax systems: ofwealth as well as income, and of corporate as well as individual taxation.

One further aspect of co-production, with important distributional implica-tions, is also critical. All economies operate within biophysical systems. Froman ecological point of view, economic activity generates value by usingmaterial resources and energy which are subsequently returned to theenvironment as waste, in a thermodynamically more disordered (entropic)state.59 Economic growth can derive from expanding the use of biophysicalresources, or from an increase in the economic value generated per unit ofthroughput. Today, with many of the natural environment’s biophysicalfunctions at or close to their safe limits, it powerfully matters—not least tothe distribution of wealth between present and future generations—which ofthese predominates. In the context of dangerous climate change, as Zenghelisargues, the centrality of carbon to industrial economies makes an under-standing of structural change—not just corrections to marginal market fail-ures—particularly vital to economic analysis.

These three insights therefore have profound implications for how wethink about economic policy-making. Public policies are not ‘interventions’in the economy, as if markets existed independently of the public institutionsand social and environmental conditions in which they are embedded. Therole of policy is not one simply of ‘correcting’ the failures of otherwise freemarkets. It is rather to help create and shape markets to achieve the co-pro-duction, and the fair distribution, of economic value. Economic performancecannot be measured simply by the short-term growth of GDP, but requiresbetter indicators of long-term value creation, social well-being, inequalityand environment sustainability.60

Western capitalism has not been functioning well in recent years. Main-stream economic policies, reflecting an outdated economic orthodoxy, haveproved themselves unable to set it on a new course. We hope the ideas setout in this book show that there is nothing inevitable about this failure. Amore innovative, sustainable and inclusive economic system is possible. Butit will require fundamental changes in our understanding of how capitalismworks, and how public policy can help create and shape a differenteconomic future.

Notes1 http://www.telegraph.co.uk/news/uknews/theroyalfamily/3386353/The-Queen-asks-why-no-one-saw-the-credit-crunch-coming.html (accessed 12 April 2016).

2 Following the Queen’s question, the British Academy held a seminar to enquireinto how it should be answered, and subsequently wrote to the sovereign toexplain their conclusions. See http://www.britac.ac.uk/news/newsrelease-economy.cfm (accessed 12 April 2016).

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http://www.telegraph.co.uk/news/uknews/theroyalfamily/3386353/The-Queen-asks-why-no-one-saw-the-credit-crunch-coming.html

http://www.telegraph.co.uk/news/uknews/theroyalfamily/3386353/The-Queen-asks-why-no-one-saw-the-credit-crunch-coming.html

http://www.britac.ac.uk/news/newsrelease-economy.cfm

http://www.britac.ac.uk/news/newsrelease-economy.cfm

3 S. Verick and I. Iyanatul, The Great Recession of 2008–2009: Causes, Consequencesand Policy Responses, Discussion Paper No 4934, Bonn, Institute for the Study ofLabor, 2010.

4 IMF, World Economic Outlook: Uneven Growth—Short- and Long-Term Factors,Washington, DC, International Monetary Fund, April 2015, p. 171. The threeadvanced economies that saw real GDP growth in 2009 were Australia, Koreaand Israel.

5 International Monetary Fund, International Labour Organization, The Challenges ofGrowth, Employment and Social Cohesion, 2010, http://www.osloconference2010.org/discussionpaper.pdf (accessed 12 April 2016).

6 Wall Street Aristocracy Got $1.2 Trillion in Secret Loans, Bloomberg, 11 August 2011,http://www.bloomberg.com/news/articles/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans (accessed 12 April 2016); National Audit Office,Taxpayer Support for UK Banks, FAQs, https://www.nao.org.uk/highlights/taxpayer-support-for-uk-banks-faqs/ (accessed 12 April 2016). These figures relate topeak exposure on a single day. In the US, the cumulative amount committed by theFederal Reserve to shoring up the financial system has been calculated at between$7.77 trillion by Bloomberg—Secret Fed Loans Gave Banks $13 Billion Undisclosed toCongress, Bloomberg Markets, 28 November 2011, http://www.bloomberg.com/news/articles/2011-11-28/secret-fed-loans-undisclosed-to-congress-gave-banks-13-billion-in-income (accessed 12 April 2016)—and $29 trillion by James Felkerson,$29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient,Working Paper No. 698, Levy Economics Institute of Bard College, 2011, http://www.levyinstitute.org/pubs/wp_698.pdf (accessed 12 April 2016).

7 OECD, General government deficit (indicator), 2016, doi: 10.1787/77079edb-en(accessed 12 April 2016).

8 Testimony to the Congressional Committee on Oversight and GovernmentReform, 23 October 2008, https://www.gpo.gov/fdsys/pkg/CHRG-110hhrg55764/html/CHRG-110hhrg55764.htm (accessed 12 April 2016).

9 R. J. Shiller, Irrational Exuberance, Princeton, NJ, Princeton University Press, 2000.10 C. Reinhart and K. Rogoff, ‘Growth in a time of debt’, American Economic Review,

vol. 100, no. 2, 2010, pp. 573–8.11 L. Laeven and F. Valencia, Systemic Banking Crises: A New Database, IMF Working

Paper No. 224, November 2008.12 J. A. Turner, Between Debt and the Devil: Money, Credit, and Fixing Global Finance,

Princeton and Oxford, Princeton University Press, 2016.13 Unemployment was lower in 2014 than in 2007 in five OECD countries: Chile,

Germany, Israel, Japan and Poland. Averaged across OECD countries, unemploy-ment was at 5.6 per cent in 2007, peaked at 8.3 per cent in 2010 and was at 7.3per cent in 2014. For EU28 countries, unemployment was lowest in 2008 at 7 percent, and continued rising to a peak of 10.8 per cent in 2013. OECD, Unemploy-ment rate (indicator), 2016, doi: 10.1787/997c8750-en (accessed 12 April 2016).

14 Low Pay Commission, National Minimum Wage, Low Pay Commission Report2013, Cm 8816, London, The Stationery Office, 2014.

15 W. Lazonick, ‘Profits without prosperity’, Harvard Business Review, vol. 92, no. 9,2014, pp. 46–55.

16 OECD, OECD Compendium of Productivity Indicators 2015, Paris, OECD Publishing,2015, doi:10.1787/pdtvy-2015-en (accessed 12 April 2016).

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http://www.osloconference2010.org/discussionpaper.pdf

http://www.osloconference2010.org/discussionpaper.pdf

http://www.bloomberg.com/news/articles/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans

http://www.bloomberg.com/news/articles/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans

https://www.nao.org.uk/highlights/taxpayer-support-for-uk-banks-faqs/

https://www.nao.org.uk/highlights/taxpayer-support-for-uk-banks-faqs/

http://www.bloomberg.com/news/articles/2011-11-28/secret-fed-loans-undisclosed-to-congress-gave-banks-13-billion-in-income



http://www.levyinstitute.org/pubs/wp_698.pdf

http://www.levyinstitute.org/pubs/wp_698.pdf

http://dx.doi.org/10.1787/77079edb-en

https://www.gpo.gov/fdsys/pkg/CHRG-110hhrg55764/html/CHRG-110hhrg55764.htm

https://www.gpo.gov/fdsys/pkg/CHRG-110hhrg55764/html/CHRG-110hhrg55764.htm

http://dx.doi.org/10.1787/997c8750-en

http://dx.doi.org/10.1787/pdtvy-2015-en

17 R. J. Gordon, Is US Economic Growth Over? Faltering Innovation Confronts the SixHeadwinds, Centre for Economic Policy Research, Policy Insight No. 63, September2012, http://www.cepr.org/sites/default/files/policy_insights/PolicyInsight63.pdf (accessed 12 April 2016).

18 See for example L. H. Summers, ‘U.S. economic prospects: secular stagnation,hysteresis, and the zero lower bound’, Business Economics, vol. 49, no. 2, 2014, pp.65–73, http://larrysummers.com/wp-content/uploads/2014/06/NABE-speech-Lawrence-H.-Summers1.pdf (accessed 12 April 2016); C. Teulings and R. Baldwin(eds), Secular Stagnation: Facts, Causes and Cures, London, CEPR Press, 2014, http://voxeu.org/sites/default/files/Vox_secular_stagnation.pdf (accessed 12 April 2016).

19 Real median US household income in 2014 was $53,657 compared with $52,623in 1990 (using 2014 CPI-U-RS Adjusted Dollars). Source: US Bureau of the Cen-sus, made available by the Federal Bank of St Louis, https://research.stlouis-fed.org/fred2/series/MEHOINUSA672N (accessed 12 April 2016).

20 E. Stockhammer, Why Have Wage Shares Fallen? A Panel Analysis of the Determinantsof Functional Income Distribution, Geneva, International Labour Office, 2013. Thewage share is adjusted to take account of self-employment. ‘Advanced economies’includes all high-income OECD countries, with the exception of South Korea.

21 ILO, Global Wage Report 2012/13, Geneva, International Labour Organisation,2013.

22 OECD, World Economic Outlook: Spillovers and Cycles in the Global Economy, Paris,OECD Publishing, 2007, Figure 5.15.

23 OECD, Income Inequality: The Gap between Rich and Poor, Paris, OECD Publishing,2015.

24 T. Piketty and E. Saez, ‘Income inequality in the United States, 1913–19980, QuarterlyJournal of Economics, vol. 118, no. 1, 2003, pp. 1–39, Tables A3 and A6—Updatedversion downloaded from http://eml.berkeley.edu/~saez/. Figures are in real2013 dollars and include capital gains (accessed 12 April 2016).

25 OECD, OECD Employment Outlook 2012, Paris, OECD Publishing, 2012, http://dx.doi.org/10.1787/empl_outlook-2012-en (accessed 12 April 2016). Figures relateto countries for which data is available.

26 ILO, Global Wage Report 2010/11, Geneva, International Labour Organisation,2010, Figure 20.

27 OECD, Youth unemployment rate (indicator), 2016, doi: 10.1787/c3634df7-en(accessed 12 April 2016).

28 OECD, In It Together: Why Less Inequality Benefits Us All, Paris, OECD Publishing,2015, Figure 4.1.B, http://dx.doi.org/10.1787/888933208028 (accessed 12 April2016).

29 Ibid, http://dx.doi.org/10.1787/888933207711 (accessed 12 April 2016).30 Data from http://piketty.pse.ens.fr/files/capital21c/en/xls/, Figures 10.3 and

10.5, and Table S10.1 (accessed 12 April 2016).31 J. Rockstr€om et al., ‘A safe operating space for humanity’, Nature, no. 461, 24

September 2009, pp. 472–5, http://www.nature.com/nature/journal/v461/n7263/full/461472a.html (accessed 12 April 2016); W. Steffen et al., ‘Planetaryboundaries: guiding human development on a changing planet’, Science, vol. 347,no. 6223, 13 February 2015, http://science.sciencemag.org/content/347/6223/1259855 (accessed 12 April 2016).

32 Intergovernmental Panel on Climate Change, Climate Change 2014: Impacts, Adapta-tion, and Vulnerability: Summary for Policymakers, Cambridge and New York,

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http://www.cepr.org/sites/default/files/policy_insights/PolicyInsight63.pdf

http://www.cepr.org/sites/default/files/policy_insights/PolicyInsight63.pdf

http://larrysummers.com/wp-content/uploads/2014/06/NABE-speech-Lawrence-H.-Summers1.pdf

http://larrysummers.com/wp-content/uploads/2014/06/NABE-speech-Lawrence-H.-Summers1.pdf

http://voxeu.org/sites/default/files/Vox_secular_stagnation.pdf

http://voxeu.org/sites/default/files/Vox_secular_stagnation.pdf

https://research.stlouisfed.org/fred2/series/MEHOINUSA672N

https://research.stlouisfed.org/fred2/series/MEHOINUSA672N

http://eml.berkeley.edu/~saez/

http://dx.doi.org/10.1787/empl_outlook-2012-en

http://dx.doi.org/10.1787/empl_outlook-2012-en

http://dx.doi.org/10.1787/c3634df7-en

http://dx.doi.org/10.1787/888933208028

http://dx.doi.org/10.1787/888933207711

http://piketty.pse.ens.fr/files/capital21c/en/xls/

http://www.nature.com/nature/journal/v461/n7263/full/461472a.html

http://www.nature.com/nature/journal/v461/n7263/full/461472a.html

http://science.sciencemag.org/content/347/6223/1259855

http://science.sciencemag.org/content/347/6223/1259855

Cambridge University Press, 2014, https://www.ipcc.ch/report/ar5/wg2/ (ac-cessed 12 April 2016).

33 The first assessment report of the Intergovernmental Panel on Climate Changewas published in 1990. See https://www.ipcc.ch/publications_and_data/publications_ipcc_first_assessment_1990_wg1.shtml (accessed 12 April 2016).

34 T. O. Wiedmann et al., ‘The material footprint of nations’, Proceedings of theNational Academy of Sciences of America, vol. 112, no. 20, 2015, pp. 6271–6,doi:10.1073/pnas.1220362110 (accessed 12 April 2016).

35 There is a lively debate among monetary theorists over whether governments, asopposed to central banks, do in practice create new money through governmentspending, or whether they have to acquire bank-credit money through taxationor borrowing prior to government spending. In practice, in the UK and EuropeanUnion, legal and institutional arrangements are designed to prevent the expan-sion of the money supply through government spending. But many economistswould accept the fundamental argument that monetary expansion is key toachieving sufficient nominal demand growth, and that state money creation maybe preferable to private bank credit creation. For a good discussion, see J. A.Turner, Between Debt and the Devil: Money, Credit, and Fixing Global Finance, Prin-ceton, NJ, Princeton University Press, 2015.

36 The original account of market failure is in K. Arrow, An Extension of the BasicTheorems of Classical Welfare Economics, paper presented at the Second BerkeleySymposium on Mathematical Statistics and Probability, Berkeley, 1951.

37 G. Tullock, A. Seldon and G. L. Brady, Government Failure: A Primer in PublicChoice, Washington, DC, Cato Institute, 2002.

38 P. B. Evans, Embedded Autonomy: States and Industrial Transformation, Princeton,NJ, Princeton University Press, 1995.

39 K. Polanyi, The Great Transformation: The Political and Economic Origins of OurTime, Boston, MA, Beacon Press, 2001 [1944].

40 As Polanyi put it: ‘The road to free markets was opened and kept open by anenormous increase in continuous, centrally organized and controlled intervention-ism . . . Administrators had to be constantly on the watch to ensure the free work-ing of the system.’ Ibid, p. 144.

41 R. R. Nelson and S. G. Winter, An Evolutionary Theory of Economic Change, Cam-bridge, MA, Harvard University Press, 2009.

42 W. Lazonick and M. O’Sullivan, ‘Maximizing shareholder value: a new ideologyfor corporate governance’, Economy and Society, vol. 29, no. 1, 2000, pp. 13–35.

43 W. Hutton, How Good We Can Be: Ending the Mercenary Society and Building a GreatCountry, London, Abacus, 2015.

44 Lawrence Summers, October 1991, when Chief Economist at the World Bank; citedby M. Ellman, ‘Transition economies’, in H.-J. Chang, ed., Rethinking DevelopmentEconomics, London and New York, Anthem Press, 2003, pp. 179–98 (p. 197).

45 P. A. Hall and D. Soskice, eds., Varieties of Capitalism. The Institutional Foundationsof Comparative Advantage, Oxford, Oxford University Press, 2001.

46 C. Perez, Technological Revolutions and Financial Capital: The Dynamics of Bubblesand Golden Ages, London, Edward Elgar, 2002.

47 J. A. Schumpeter, Capitalism, Socialism, and Democracy, 3rd edn, New York, Har-per, 1962 [1942].

48 Nelson and Winter, An Evolutionary Theory of Economic Change; see also R. Nelson,Economic Development from the Perspective of Evolutionary Economic Theory,

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https://www.ipcc.ch/report/ar5/wg2/

https://www.ipcc.ch/publications_and_data/publications_ipcc_first_assessment_1990_wg1.shtml

https://www.ipcc.ch/publications_and_data/publications_ipcc_first_assessment_1990_wg1.shtml

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GLOBELICS Working Paper No. 2007-02, 2007, http://dcsh.xoc.uam.mx/eii/globelicswp/wpg0702.pdf (accessed 12 April 2016).

49 A. Stirling, ‘“Opening up” and “closing down” power, participation, and plural-ism in the social appraisal of technology’, Science, Technology and Human Values,vol. 33, no. 2, 2008, pp. 262–94 (accessed 12 April 2016).

50 D. Foray, D. C. Mowery and R. R. Nelson, ‘Public R&D and social challenges:what lessons from mission R&D programs?’ Research Policy, vol. 41, no. 10, 2012,pp. 1697–702; M. Mazzucato, ’From market fixing to market-creating: a newframework for innovation policy’, forthcoming in special issue of Industry andInnovation: ‘Innovation Policy – can it make a difference?’, 2016, available atdoi:10.1080/13662716.1146124 (accessed 12 April 2016).

51 J. M. Keynes, The General Theory of Employment, Interest and Money, London,Macmillan, 2007 [1936].

52 Shiller, Irrational Exuberance.53 ‘I expect to see the State . . . taking an ever greater responsibility for directly

organising investment . . . I conceive, therefore, that a somewhat comprehensivesocialisation of investment will prove the only means of securing an approxima-tion to full employment.’ J. M. Keynes, The Collected Writings of John MaynardKeynes, vol. 7, Cambridge, Cambridge University Press, 1973, pp. 164, 378.

54 H.-J. Chang, Globalization, Economic Development and the Role of the State, London,Zed Books, 2002.

55 T. Piketty, Capital in the 21st Century, Cambridge, MA, Harvard University Press,2014.

56 A. Berg and J. D. Ostry, Inequality and Unsustainable Growth: Two Sides of the SameCoin?, International Monetary Fund Staff Discussion Note No. 11/08, April 2011,https://www.imf.org/external/pubs/ft/sdn/2011/sdn1108.pdf (accessed 12 April2016); F. Cingano, Trends in Income Inequality and Its Impact on Economic Growth,OECD Social, Employment and Migration Working Papers, No. 163, December2014, http://www.oecd.org/els/soc/trends-in-income-inequality-and-its-impact-on-economic-growth-SEM-WP163.pdf (accessed 12 April 2016).

57 J. D. Ostry, A. Berg and C. G. Tsangarides, Redistribution, Inequality and Growth,IMF Staff Discussion Note, SDN 14/02, 2014, https://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf (accessed 12 April 2016). For a wider discussionon the relationship between economic performance, well-being and inequality,see R. G. Wilkinson and K. Pickett, The Spirit Level: Why More Equal SocietiesAlmost Always Do Better, London, Allen Lane, 2009.

58 R. Riley and C. Rosazza Bondibene, Raising the Standard: Minimum Wages andFirm Productivity, NIESR Discussion Paper 449, National Institute for Economicand Social Research, 2015, http://www.niesr.ac.uk/sites/default/files/publications/Minimum%20wages%20and%20firm%20productivity%20NIESR%20DP%20449.pdf (accessed 12 April 2016).

59 N. Georgescu-Roegen, The Entropy Law and the Economic Process, Cambridge, MA,Harvard University Press, 1971; M. Jacobs, The Green Economy, London, PlutoPress, 1991; H. E. Daly and J. Farley, Ecological Economics: Principles and Applica-tions, Washington, Island Press, 2011.

60 J. E. Stiglitz, A. Sen and J. P. Fitoussi, Report by the Commission on the Measurementof Economic Performance and Social Progress, Paris, Commission on the Measure-ment of Economic Performance and Social Progress, 2010.


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http://dcsh.xoc.uam.mx/eii/globelicswp/wpg0702.pdf

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